 Trade Fragmentation, Inflationary Pressures and Monetary PolicyMaria Ludovica Ambrosino, Jenny Chan and Silvana Tenreyro No 21024, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: How does trade fragmentation affect inflationary pressures? What is the response of monetary policy needed to sustain inflation at target? To address these questions, we develop a two-sector, small open-economy model featuring imperfect international risk-sharing and household heterogeneity, capturing both the supply-side and demand side effects of fragmentation. In the model, fragmentation takes the form of import-price increases or a decline in tradable-sector productivity. The sign and magnitude of its impact on inflationary pressures, and the appropriate policy response, depend not only on the direct effect of higher import prices or lower productivity on supply but also, crucially, on how aggregate demand adjusts to lower real incomes. In turn, this depends on the pace of fragmentation (gradual versus front-loaded) and other key structural factors highlighted by the model. We compare outcomes under Taylor-type monetary policy rules to a constrained-efficient allocation. Keywords: Monetary policy; Inflation; Heterogeneity; Globalization (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21024 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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